Monday 20 February 2012

5 ways to protect against competition

Happy Monday, everyone!  Have you ever had a great idea for a business, then after a quick Google search, you find there's someone doing something similar?  What was your reaction?  My reaction used to be "better think of a new idea."  Having studied some business cases I realize now that this reaction is a bit ridiculous.

The business world is full of competitors who are in similar businesses, but entrepreneurs are often stuck in a mentality that it is your idea that separates your business from the competition.  This may have been true in the 1950s (though I'm not convinced of that... I wasn't around, I don't know) but it is not true today. If you do have a truly unique idea, it will not take long before you have copycats.  What distinguishes a business today is not so much the idea, but how it is implemented.  So without further ado, here are 5 ways that a business can protect itself against competition.

1. The first mover advantage

I know.  I just said that this wasn't the advantage people think it is, but hear me out. It's true that being the first mover with a new idea isn't a big deal.  The exception is if being first blocks others from entering the market because of various market constraints.

A classic example of this is Walmart.  Sam Walton's vision with the store was to give regular folk opportunity to buy the same type of things that wealthier people could buy.  To that end, Walmart expanded to small towns that didn't have a big retail store in them.  They were often the first large chain in town, and the towns were small enough that they could only really support one store.  That made it really difficult for other department stores to start up there.  As the years passed and the town grew, other stores were eventually able to set up, but by then Walmart was firmly established in the market.

2. Regulation

If the government, for whatever reason, regulates your industry, you may have an advantage, and this may or may not be related to being the first mover. Nobody wants 50 different companies tearing up the street to lay down phone cables, for example, so the government only allows one company to have a monopoly, and then regulates the prices.

Regulation can also be an advantage for new businesses. Recently a few major US cities like New York have required nutritional information to be included on restaurant menus.  This is a big expense for existing restaurants, as they have to change their menus and make sure that the staff is trained to keep portions consistent.  New restaurants don't have to change anything.

3. Cannibalization inhibitors

Think of a business like a ship.  The larger the ship, the longer it takes to change direction. Large businesses are large because they have a structure and systems that work. They have certain processes that people have done many times. This means that larger, established businesses are very effective at what they do, but have difficulty responding to changes in the market.

When Netflix started up with their Internet-based DVD rentals, it should have been the easiest thing in the world for the market leader, Blockbuster, to copy.  Blockbuster was flush with cash, and was a trusted name in DVD rentals, so how hard could it have been?

The problem was that Blockbuster's stores were franchises, they weren't company owned.  That means that independent entrepreneurs purchased the rights to set up a Blockbuster store and make money from it in exchange for paying licensing fees. These franchise owners did not want Blockbuster to enter the online DVD market because they were afraid the online sales would cannibalize their store's profits.  The very structure that helped Blockbuster expand and dominate in the past prevented them from competing with Netflix.

4. Investment in co-specific assets

Having a great invention is not the same as having a successful business. Often a company will need other capabilities, other assets, other resources to become successful, and if you have these assets and your competitors don't, it doesn't matter that you're not the first mover.

When British technology company EMI came out with the CAT scanner in 1973, they had great technology and a huge headstart on the competition, but they had to develop manufacturing, sales and service capabilities from scratch.  GE was able to develop a similar scanner that avoided infringing on EMI's patents by 1976. At that time, GE had an existing force of 300 salespeople and 1200 service technicians.  Even though they entered 3 years later they had such a strong advantage that EMI eventually abandoned their CAT scan business.

My cat performing a CAT scan
My CAT scan shows that a slipper is not food.

5. System complexity

Sometimes it's not one big feature that makes your business different from the rest, but a thousand little things. By making sure every aspect of your business works effectively toward a business goal, you may find competitors are unable to keep up.

The business case that every strategy class has loved to talk about since the 1970s is the case of SouthWest Airlines. They burst into the market with the business-level strategy of being a low-cost airline.  Rather than one major difference, SouthWest made many small changes to the airline business model in order to be as low-cost as possible. It was the complexity of this large number of small improvements that made it very difficult for competitors to copy them. The larger incumbents did, in fact, attempt to start low-cost subsidiaries, but none of them effectively matched SouthWest.

Counter-intuitively, the complexity in Southwest is in the myriad ways they keep the service simple. Here are a few:
  1. Point to point service: Competitors used a hub-and-spoke model, flying people to the hub city and then out to their destination.  Point to point service gave southwest fewer delays and less time on the ground.
  2. Service to smaller airports: By not focusing on the hub cities, SouthWest reached a market other airlines couldn't.
  3. One type of plane: SouthWest used Boeing 737s exclusively, meaning they had significantly lower maintenance costs.
  4. No frills: Every seat is identical and there are no extra fees. Tickets are sold one-way only. This reduces the cost of scheduling and ensures customers know exactly what they're getting when they pay.
  5. Simple in-flight service: No meals, no drinks, no assigned seats. Fewer items to load and unload means Southwest can have a plane unloaded and ready for another flight in as little as 20 minutes.

Concluding thoughts

In spite of what the movies tell us, success in the marketplace is less about the idea and more about the execution. The business needs a reason that people will buy from you and not your competition, and an innovative idea often isn't enough.  There must be some other barrier to entry, some other aspect that distinguishes your company from the competition, and it must be something that customers are willing to pay for. This is what generates competitive advantage.


Sherri Williams said...

My cat! And my slipper! Was that CAT scan authorized?

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